Top energy sector picks as oil prices push higher

Oil prices (BZ=F, CL=F) have been on the rise this month, as geopolitical tensions and summer demand mount. Wells Fargo senior energy analyst Roger Read joins Morning Brief to give insight into the movement in oil prices and how investors can play the energy sector moving forward.

Read explains that the most important factor to watch in the industry is how OPEC comes back into the market: "They stated at their last meeting they want to bring their oil back in but that they put caveats on it. We want to bring it back in a way that doesn't upset the market. So they've kind of put a number, let's call it aspirational, and then they've got a number that let's call it the realist number. And what it says is OPEC wants to put more oil on the market, OPEC will put more oil on the market, but OPEC wants to do it in a rational way," Read notes.

In the integrated oils sector, Chevron (CVX) is Read's "top pick," while Suncor (SU) is a key player in the international exploration and production sector. In the refining space, Phillips 66 (PSX) is also a top Wells Fargo pick.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Nicholas Jacobino

Video Transcript

Crude taking a breather from its recent rally.

We've got prices giving back some of those recent gains this morning.

You're looking at a drop at just about a half of a percent here for Brent.

Also that move lower here for crude.

Well, so far this month though, it's been a bit of a different story.

We have crude up over 4% as demand in the US continues to grow and also rising geopolitical tensions pushing prices higher.

So where do we go from here here to discuss the best players within the sector?

We wanna bring in Roger Reed.

He's Wells Fargo's refining an integrated oil and gas senior analyst.

It's great to have you.

So let's first just take a step back before we get into those specific places.

Talk to me just about where you see the price of crude and brunt heading lots of speculation about whether or not we are going to see a b umpire driven by that demand this summer.

What do you think?

Yeah, good morning.

Thanks for, thanks for having me on.

Yeah, I mean, I think summer driving season should be fine, right?

If you look in uh retail pricing.

It's the most affordable.

It's been in three years in the US and that's a huge component of it.

Uh You look at jobs, you know, those are, are holding in fairly well, mobility and jobs are tied together.

Uh And then, you know, independent groups like AAA have said, you know, they expected record levels of travel, Memorial Day weekend and again over the Fourth of July.

So everything looks pretty solid on the driving side, diesel has been a little weak with the industrial side of the economy, but it's, it's flat, not down as, as we look at it, you know, as we kind of look out to the next coming months here.

I mean, there's gonna be a lot of focus on what some of the international moves in terms of production are and, and what are, what are your anticipations there for how that could also impact this run in the oil and gas sector?

Yeah.

So the biggest thing to watch is how OPEC comes back into the market or OPEC plus as it's kind of now called, right.

And they stated, you know, at their last meeting, they want to bring their oil back in but that they, you know, put a caveat on it, we want to bring it back in, in a way that doesn't upset the market.

So they've kind of put a number of call, it's called aspirational and then they've got a number that let's call it, the realist number.

Right.

And what it says is Opec wants to put more oil on the market.

Opec will put more oil on the market, but Opec wants to do it in a rational way.

The way we've been looking at the oil markets overall was, you know, a year ago or so we just said long term 75 Brent, 70 wt I then with the OPEC discipline, we came up $5 kind of 7580.

So oiled it, 8085 ve overshoots a little, bringing it back, puts a little pressure on to us that's still in the range of where things ought to be.

Um, but you know how exactly it'll play out.

You've got the Red Sea, you've got Ukraine tossing missiles in the Russian refineries, you've got sanctions, risk, post us elections if Trump wins on Venezuela and Iran.

So there's a ton of moving parts to it.

Roger.

We also got the, uh ie a issuing their outlook not too long ago.

And my question to you is what I, I guess how confident are you or whether or not you agree and what they are projecting when it comes to ev sales that demand ticking higher when it comes to the, the demand here for gasoline and oil peaking by the end of the decade.

Is, is that in line with what you're seeing?

Why or why not?

So, first off, uh anybody who has to make forecasts II, I feel for him.

Right.

The, the IE A takes a shot at it, we take a shot at it.

So, you know, who's right?

We'll see.

Um, we have been skeptical about the pace of ev penetration almost back to the aggressive kind of numbers that were put out in the 2020 2021 period.

Um I, if you look, uh the most recent data out of Europe, Germany had to scrap subsidies due to some specifics of German law and, and tax and spend policies.

And we saw German ev sales drop rather precipitously.

And if you look at total eu sales, they're only at about 12% of, of total.

So way below the targets they have now that's pure battery EVs, not, not hybrids and everything else.

Um But what it tells me is any place that loses it subsidies even for a short period of time is struggling to hit the targets.

And so for that reason, we are skeptical of the numbers the IE A included and therefore we have a longer timeline in terms of demand for, for oil.

And you know, in this case, gasoline transportation fuels, we think beyond 2030 you'll continue to Yeah.

Uh and Roger just while we have you here, I'm looking at a headline from AAA and, and a lot of investors who are also consumers and buyers of gas uh trying to get from point A to point B especially over the summer travel months, uh, reading headlines, like, despite the rise in temperatures, gas prices keep it cool.

What is your anticipation for how this might all trickle down to prices at the pump?

Yeah, I don't know.

Uh, for us it's not so much temperatures, I guess you'd call it more rain or no rain in terms of whether people will drive.

But, uh, yeah, the affordability thing and we look at it a couple of different ways, but one of the, the key ones is, you know, what are wages and, and what part of wages are required to buy gasoline, think of it as a ratio.

And as I said earlier, that ratio is as favorable as it's been for this time of the year, going back to the summer of 21.

And that would argue that all else equal people will feel comfortable spending the money on gasoline and mileage.

Now there's other aspects of it, right, broader inflationary pressures that can have some impact.

But at least as we think about it from the cost of a gallon of gasoline, it's a serious incentive compared to the last two summers.

Roger real quick, uh, those investors at home that are watching the segment, they're trying to figure out what the best plays are, how to invest within the oil sector at this point.

What are some of those top plays that you're looking at now?

Yeah.

So we cover a pretty wide swath of the oil and gas space.

So in the integrated oils, uh Chevron is our top pick in the inter internet, what we call international ENP Suncore is our top pick in the um refining space.

Philip 66 is our top pick.

And then in um the uh energy services space, that's, that's a tougher one for us.

But uh uh a US onshore play in Liberty oil field is, is our top pick there.

All right, Roger Reid, who is the wells Fargo?

We're finding an integrated oil and gas senior analyst.

Roger.

Great to have you here on with us today.

Appreciate it.

Thank you.

Glad to be here.

See you.